A bankruptcy trustee brought a preference action against the Michigan Employment Security Agency ("MESA"), contending that certain payments of outstanding taxes on the debtor's employer account were made pursuant to an invalid lien and within the 90-day preference period. The bankruptcy court granted MESA's summary judgment motion, holding that MESA was a secured creditor who received no more from the transfer than it would have received through distribution under the Bankruptcy Code. The trustee appealed to the district court, which dismissed the appeal for lack of jurisdiction.
The district court ordered supplemental briefing as to whether the court had jurisdiction in light of the Supreme Court's decision in Seminole Tribe of Florida v. Florida, 116 S.Ct. 1114 (1996), which held that Congress only has the power to abrogate State sovereign immunity under the Fourteenth Amendment. MESA argued that the preference action was barred by sovereign immunity, which Congress could not abrogate under the bankruptcy power. The trustee argued that MESA had waived sovereign immunity by filing proofs of claim in the bankruptcy proceeding for additional unpaid taxes beyond those involved in the preference action.
The court noted that, in 11 U.S.C.§106(b), Congress deemed a State who files a proof of claim in a bankruptcy case to have waived sovereign immunity for all actions, including preference actions under 11 U.S.C.§547, that arise out of the same transaction or occurrence as the claim. However, under Seminole Tribe, even where Congress has complete lawmaking authority in an area, such as bankruptcy, the Eleventh Amendment "prevents congressional authorization of suits by private parties against unconsenting states." The deemed "waiver" in Section 106(b) is the functional equivalent of an abrogation of sovereign immunity. While Congress does have the power to abrogate sovereign immunity under the Fourteenth Amendment, Section 106(b) was enacted pursuant to the bankruptcy power. It is not related to the Fourteenth Amendment aims of eradicating discrimination by state actors on the basis of race or gender. Accordingly, the court held Section 106(b) unconstitutional, and further held that Section 106(a) which directly purports to abrogate the States' sovereign immunity, is a fortiori unconstitutional.
Finally, the court held that MESA did not waive its sovereign immunity as to the preference action by filing proofs of claim for additional taxes, since the resolution of the preference action is not part of adjudicating the proofs of claim.
In re C.J. Rogers, Inc., Civil Action No. 95-CV-72187-DT, August 15, 1997) (Rosen, J.) (Docket No. __, 27pp.).
This article was written by Ronald S. Longhofer, a partner in our Litigation Department, and previously appeared in the November 1997 edition of the Michigan Bar Journal.